Picking up Microsoft Surface Is a Huge Win for AMD Stock

Buy AMD stock for the long-term growth prospects

Advanced Micro Devices (NASDAQ:AMD) scored a huge win last week when Microsoft (NASDAQ:MSFT) announced its Surface Laptop 3 would use its Ryzen 5 and 7 chips. AMD Stock, which had been lagging, caught a bump on the news.

Source: JHVEPhoto / Shutterstock.com

The victory over Intel (NASDAQ:INTC) is a continuation of AMD’s business recovery in the computing space. Gaining market share is only a start, so expect AMD stock to trend higher.

Microsoft said its Surface Laptop 3 would use an SoC version of AMD Ryzen CPUs. It will feature a Zen+ 12nm APU with up to 11 compute units of Vega graphics. The chip will fall within the 15W TDP. That Microsoft will power the Surface Pro X with a Snapdragon SQ1 indicates the software giant is diversifying its CPU suppliers.

AMD’s chip is different than the standard Ryzen and is designed for the Surface’s needs. It will give more control to the OS for voltage and frequency. And as Anandtech reported:

AMD did state that features like modern standby, 10-point touch, and the responsiveness needed involved work from both teams to ensure the best user experience possible.

AMD’s CPU sales from Surface 3 sales are unlikely to add to more than $20-25 million in revenue but it is a strong starting point. Competitors vying for the mobile computer market share, such as HP Inc. (NYSE:HPQ), Dell (NYSE:DELL), Lenovo, and others might follow suit.

They may power their mobile computers with AMD’s SoC instead of using an Intel chip. AMD’s flexibility in delivering a chip that is software-driven should encourage notebook vendors to use AMD CPUs over Intel chips.

The Surface Laptop 3 is a model for the ideal hardware design for Windows-powered computers. And with AMD and Microsoft already working together on the next Surface device, AMD has a secure future in the mobile computer market.

Apple May Respond

Apple (NASDAQ:AAPL) faces imminent competitive pressures from Microsoft’s Surface. Its MacBook Pro is expensive and offers very few new features. The touch bar is pretty but demands a premium that consumers apparently are unwilling to pay. Apple’s MacBook Air has underpowered parts. Not only is memory and SSD storage too low, but also the CPU is weak.

Apple could remedy weak computing performance by copying Microsoft. It could also use an AMD SoC for the MacBook Airs and the mobile Ryzen CPUs for the MacBook Pro.

AMD Powers Google Cloud

AMD’s EPYC CPU is clearly a strong offering. It has 64 processing cores and is manufactured on the 7nm process. Winning Google’s business should accelerate server sales over the next few quarters.

Google has a healthy Cloud solution that requires constant upgrades and server additions. AMD will likely see EPYC sales growing at an even faster pace.

At nearly $29, AMD stock is off from the $34 peak reached in August. Still, AMD is not a cheap investment at this time. It trades at around 27 times forward earnings and at 5.6 times sales.

EPS will grow this year but will only grow at 36% in the next five years. Investors are paying for AMD to grow at least at that pace. If the economy weakens, brought upon by a weaker economy and an ongoing US/China trade war, then shares risk correcting.

The Bottom Line on AMD Stock

AMD is expensive relative to Nvidia (NASDAQ:NVDA) and Intel. The latter two offer more safety and are reasonably priced. AMD’s upside is limited in the short-term but its medium-term prospects are strong.

Look for the stock holding up for the rest of the year and taking off in 2020. That is when sales resume an above-average growth, led by Ryzen and EPYC sales.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.